Investors Could Be Concerned With Voltalia's (EPA:VLTSA) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Voltalia (EPA:VLTSA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Voltalia, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.025 = €62m ÷ (€3.0b - €609m) (Based on the trailing twelve months to December 2022).

So, Voltalia has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.8%.

See our latest analysis for Voltalia

In the above chart we have measured Voltalia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Voltalia.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Voltalia, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.5% from 6.0% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Voltalia's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Voltalia is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 78% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Voltalia, we've spotted 2 warning signs, and 1 of them can't be ignored.

While Voltalia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.